A potential game changer in the world of High Frequency Traders is coming soon to Europe, and potentially, to the USA. In 2014, fees on financial trading will begin. Rates will range from 00.1% to 00.01% for trades over €10,000 Euros, depending upon the traded asset.

Under existing lack of HFT rules, High Frequency Traders exert a tax on all other investors. This is due to the corrupt relationship they have with exchanges such as the NYSE and NASDAQ. HFT firms pay these exchanges to co-locate their servers, to see orders before the public, and to front run them. They also allow them to send millions of spoof orders per minute, canceling and re-offering them. This stresses the entire plumbing of the electronic markets, raising costs form everyone else.

While some have incorrectly described this as adding liquidity, the Flash crash taught us that’s nonsense.

Here are the HFT fee details:

“The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed.

Manfred Bergmann, the European Commission director for indirect taxation and tax administration and a primary designer of the tax plan, calls it a “Triple A approach — all markets, all actors and all products.”

To get out of the tax, a financial institution would have to do more than simply move its headquarters out of the 11 countries that now plan to impose the tax. It would also have to forgo serving clients in any of those countries and trading in securities or derivatives from any of the countries. Officials are confident that no major institution will be willing to forsake such large markets as France, Germany, Italy and Spain.”

If American regulators were smart — something we know they are not — the USA would join Europe in pursuing this same goal. In the meantime, the HFT tax steals money from long term investors.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “European HFT Fee Coming; USA Next?”

If Europe makes HFT local impractical, would that create a commercial real estate boom in NY and Chicago as they expand their footprint in the casino that’s still open? I’d expect an immediate increase in NASDAQ and NYSE volume.

Given the way Washington works, if this were to ever see the light of day in US, EVERONE of any size, power and importance would lobby for and get a “mission critical carve out” from the tax “for the benefit of the marketplace”.

Leaving only the smallest and least connected to pay the tax and even further tip the scales in direction of the big players. It is the American way.

If the stated objective of the FTT were to get rid of malicious HFT firms that would be one thing. But the FTT is largely intended to collect penance from financial service firms for their previous transgressions. The problem with that is that most brokers will almost certainly be passing on the taxes to their clients, so you’re going to end up with pension funds, mutual funds, and individual investors ultimately footing most of the bill. The Soc Gen’s and Deutsche Bank’s of the world aren’t going to end up paying much of the tax.

On another note, this will be a fascinating case study for the liquidity provided by HFTs. The tax appears to be sufficiently large to make their business models non-viable, so if spreads remain the same after the tax is implemented then the evidence will support the assertion that they don’t really provide liquidity. However, if spreads widen then the opposite will obviously be true.

Lastly, it’s important to note that London remains the largest European trading destination, and when at all possible you’re going to have trades taking place with London-based investment firms trading through London-based brokers. This law seems to be to the massive detriments of brokers based in the EU – who in their right mind would use Deutsche Bank as an executing broker when you have dozens of other choices that would not result in paying the FTT. Obviously this isn’t terribly relevant for continental-based securities but it will be hugely relevant for everything else.

Seems that companies would simply find out how to break up trades into smaller lots to avoid the “10,000″ threshold, so this tax will probably end up only impacting investors not even participating in HFT. However, I don’t quite see how HFT affects long-term investors at all. I think you meant to say traders or short-term investors.

But yes, the answer to horrible regulation is let’s pile more regulation onto it! Surely that’ll fix everything. All this does is affects the people not participating in HFT.

IANAMM (I am not a market maker), and have no direct experience in institutional finance. I am a small investor, and occasionally day trade. I also own mutual funds shares in retirement accounts, so I suppose I am a “high frequency trader” in one context and a “long term investor” investor in another.

My objectives are the same as anyone else: I want to make as much money as possible from my long and / or short positions.

Two developments have been great for the small investor. Discount brokers and decimalization. In the article. Mr. Norris points out that an HFT tax would add less than the old 1/8th spread before decimalization. Does this make the tax acceptable? Really? Maybe we should go back to brick sized mobile phones, because they were acceptable once. I also believe anyone who thinks the tax will stay at “only 0.01%” is delusional.

From Wikipedia:

“In 1894, Democrats in Congress passed the Wilson-Gorman tariff, which imposed the first peacetime income tax. The rate was 2% on income over $4000 ($107,446.15 in 2013 dollars), which meant fewer than 10% of households would pay any.”

I fully expect elected officials to use the same argument outlined in Mr. Norris’ article to increase the tax to the old 1/8th spread at in the near future, maybe more. In my trading, I have not seen much effect from HFT, maybe it actually does improve liquidity for me, maybe it doesn’t. All I know is that it is very hard to tell. As for the argument that HFT makes the market more crash prone, what caused crashes before computers existed?

The idea that European governments are going to be allowed to export their tax policy to the US impresses me as being an important sovereignty issue. Obviously countries do this through tariffs and other mechanisms, but this seems to be an egregious use of taxing power, and it amazes me that people in our Congress would even tolerate the idea.

I read once that European companies use bank loans far more than capital markets to finance expansion and other aspects of doing business. In the US, companies are more reliant on capital markets. The European HFT tax as I understand it might have the insidious effect of increasing costs to US businesses, making them less competitive with European companies. A subtle ulterior motive on the part of European governments, perhaps?

One final thought. Please define “long term investor.” Someone like Warren Buffett, who never wants to sell? Buy and hold until retirement, whenever that is? 5 years? 1 year? 6 months? 5 days? 10 minutes? Who is to say? How is “long term investment” not an entirely capricious term? Should people who buy things at garage sales and resell them on eBay not have a minimum holding period, then? Why or why not?

I would certainly appreciate it if anyone could provide convincing counterpoints to my concerns. I foresee huge problems and expense on the horizon if the US subjects its financial future to the desires of foreign tax authorities in the form of acquiescence to the European transaction tax, or even a domestic one.

SFbear – the option spreads will rise much more than the tax, dare I say they will explode. Consider this: each time a marketmaker is selling/buying an option he is typically commiting to do a significant amount of delta hedging trades. Now think how the economics of this will change if he will have to pay additional tax on all delta hedges, and his counterparties whom he will be trading with to do the said hedging will demand better prices for themselves to compensate for the tax.

1. Frontrunners are built in feature in all continuous trading markets. The math can be found in any decent market microstructure texbook. Hfts are just mordern vertion of a pit scalper. To get rid of them you would need to change the market to an auction or you can use tvap and vvawp orders.

2. The infrastructure overload issue should be solved by fees on orders (possibly above some ratio of orders to trades). Taxing trades will do nothing to stem 5000 orders per second bots.

3. People programming the bots are not stupid – all the costs will be passed to someone else. Spreads will widen and liquiditg will really dry up. Which may result in lower multiples for markets and more debtatization of global economy as opposed to a more robust and healthy equity based system.

4. Some markets like options which require a lot of trades in the underlying will be devastated.

5. Liquidity shifting aka arbitrage will have to price additional costs increasing inefficiencies and in the end increasing the cost to investors and money managers.

Certain types of activity that serves absolutely no constructive purpose and just produce fees for Wall Street banksters may end up being eliminated because those activities becomes to expensive – am I to cry or what?

Maybe we should be happy if those who make gambles in the markets cannot easily sell off the risk of those gambles.

I believe the proposed tax is too steep and will affect non-high frequency traders.

Let’s say you buy a March/April calendar spread on SPY, hold it for 1 month, then sell the April option around the March option expiration date. This is hardly a high-frequency transaction. It doesn’t represent any threat to the market, and I can make an argument that it provides some service to investors by lowering the cost of insurance against crashes.
The position size is about $100. The tax amount would be anywhere from $4.5 to $20 (depending on the scenario), making this strategy unworkable.
More complex option strategies (some involve 4 legs to minimize the risk) would fare even worse.

So, in my opinion, it’s a good idea in general, but the proposed tax rates are too high. HTFs make much smaller amounts percentage-wise, and lower tax rates would be sufficient to end their game without affecting small traders.

Also, even if Europe implements this “triple A” approach, what prevents a financial institution in another country from starting trading futures that would be cash-settled and would track European indexes and even individual stocks? European institutions and securities would not be involved, since this is simply a tracking index. Investors would still be able to trade in and out tax-free.
Obviously, the tracking error would be greater than we see now, since the cost of the arbitrage would be higher due to the taxes. But that’s not such a big deal.

DeDude – and who are you to judge what is socially useful or not? When you go the grossery store do you complain that the owner is making profit? Basicly all he does is buy an inventory and carrying the risk of selling it at a loss and beeing compensated for that by selling at a mark up. Not much different from financial markets with the added twist of shorting. I will not go into all the usuall arguments about liquidity, but clearly increased trading provides at least price discovery. As a market maker in a emerging market for the last 10 years I can assure you that a hft bot making 0.01% or less on average is nothing compared to say institutional sales crossing block is an illiquid security, where the spread is calculated in percentage points and sometimes a magnitude of that. I know people dislike the activity – but in reallity the costs for investors have fallen with the rise of hfts. They just took the market from guys like nyse specialist and pit brokers, because they are much more efficient and cheap compared to human traders. There are some negative side effects which are mentioned in the post above – increased costs on ifrustructure, increased markets segmentation etc. But to address this you need an intelligent discussion of the issues and not wholesale hft bashing. And more goverment taxes is never a solution.

Why allow the co-location, order viewing and front-running in the first place? While I know it happened, in the old days of open outcry, order disclosure was illegal and punishable by fines or potentially losing your ability to trade including being barred from the industry altogether.

I and everybody else are to judge the socially usefulness of Wall Street activities. So far nobody have demonstrated to me that HFT is anything else but a “scam to skim” that do more harm than good. But if you have some fact based arguments demonstrating the “good” done (at a good price) then I am open to persuasion. The “but everybody else are as bad as us” is not good enough – nor is brain dead GOPster talking point like “government taxes is never a solution”. Do you have any data that HFT provide any real “price discovery” rather than just fluctuations to make money off? and why would price accuracy to within a fraction of a % and a fraction of a second be useful for society?

Personally I see no reason why we should allow price discovery more than once an hour. Everybody who want to purchase have to put in the amount and the most they are willing to pay. Everybody who want to sell have to put in the amount for sale and the least they are willing to accept. Then at the top of the hour things are settled up to the level where offers of sale can no longer be meet by offers of purchase. What disasters would happen under that system – except that a bunch of Wall Street leaches would have to find a real job and do something productive?

onefive – colocation is just a product of competition. nobody needs to has 0 latency per see. it your competitor all have 10 seconds latency you will do great with 9.5. so if you ban colocation there will be increased competition for office space accross the street, etc. not to mention the huge amount of money beeing spent on other hardware and developing the best software…

flashing orders, subpenning – etc – there are a lot of questionable practices out there which should be baned. But! This stupid transaction tax is doing nothing about them. It is typical policos action – pretend to do something so that the uneducated masses will cheer, while at the same time pursuing your own interest (brining in more revenue in the goverment coffers)

flipper Says:
February 23rd, 2013 at 12:23 am
“DeDude – and who are you to judge what is socially useful or not? When you go the grossery store do you complain that the owner is making profit?”

~~~

I go to another grocery store if they’re expensive.

When HFT’s, that account for 70% of all trade volume, manipulate prices that effect the market, use flash orders to chisel from me, when they sub-penny untold billions from market value, I have nowhere else to shop.

I’ll briefly introduce the idea that TBTF’s can also use the power to influence stock price/momentum in conjunction with undisclosed futures positions (CFMA that the CFTC is trying to impose position limits on), & dark pools to the advantage of secondary positions….at your expense.

It’s a known fact that HFT’s often withdraw liquidity right at the time energy and commodities report inventory.

The “liquidity” they provide is a crock, the tighter bid/ask is a short term illusion that’s nullified when they exit the market at days end.

To get rid of HFT, just divide all market operations into 2-second time slots and run the whole thing synchronously: 2 seconds to place all orders, 2 seconds to match/execute the orders, 2 seconds to report the results. Repeat every 6 seconds (10 times per minute). That ought to be fast enough.

When there is order imbalance, randomize who gets their orders filled, and how many shares they get sold/bought.

Each order time slot is blind. Nobody is allowed to see the orders in the timeslot . until AFTER execution has taken place.

Any problem with such as method?

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Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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